What's At Stake In Qualcomm's Blockbuster FTC Antitrust Trial

Last week, Qualcomm finally entered in a courtroom to defend itself against antitrust charges that have been in the works for years. For the chipmaker, its fundamental business model is at risk. For the Federal Trade Commission, it’s a chance to finally get an antitrust win that isn’t just a symbolic settlement and really bite into the inherently conflicting relationship between patents and antitrust. Meanwhile, Apple is surely watching closely to see how its own legal disputes with Qualcomm might play out.

Yes, Qualcomm is involved in a lot of legal disputes right now, so it’s easy to get confused over which one’s which. Helpfully, the FTC case, which is being litigated over the next few weeks, is basically over the same issue at the heart of previous and ongoing high-profile cases against Qualcomm: The company is accused of using its patents to be a greedy dick.

It’s been two years since the FTC first accused Qualcomm of, in the agency’s words, monopolizing “certain baseband processors to impose onerous and anticompetitive supply and licensing terms on cell phone manufacturers and to weaken competitors.” Since that initial filing, similar lawsuits have been filed by Apple and government regulators. And in January of last year, European antitrust regulators ordered Qualcomm to pay a $US1.23 ($2) billion fine for using its power to lock competitors out of the market. But it’s also scored recent victories, successfully persuading China and Germany to block some iPhone sales, claiming that Apple violates its patents.

The FTC’s case is seen as a decisive moment, and its outcome should give us an idea of how the Apple v. Qualcomm court battle will go when it begins in April. U.S. prosecutors are tasked with proving that Qualcomm’s core business of licensing its patents for baseband processor chipsets has become out of control to the point that no one has a chance of competing, innovation has been stifled, and consumers are paying more for products than they should be.

With FRANDs Like These, Who Needs Enemies?

Qualcomm has been at the forefront of designing and patenting baseband processor technologies that handle the low-level communication between a mobile device and the base stations of mobile network operators. There’s no law against being the first to do something and benefitting from that—to an extent. But those key patents have been incorporated by standard-setting organisations (SSOs) in the telecom industry, giving Qualcomm tremendous leverage when making deals to box out competing chipmakers like Intel.

In an industry like telecommunications, a lot of different technologies made by different companies need to work together. So the big players get together and agree to set certain standards, and those standards can often include proprietary tech that belongs to just a single member of the group. In order to mitigate the risk of that single member’s proprietary tech handing them control of the whole damn standard, SSOs often agree to a “FRAND” licensing arrangement. An acronym for “Fair, Reasonable, and Non-Discriminatory,” FRAND is a malleable form of agreement in which a company that owns a proprietary IP included in a standard says that they’ll always be willing to licence their property to competitors for a reasonable price. If one party decides things have become unreasonable, courts can step in and decide what adjustments should be made.

An alleged failure to live up to the FRAND commitments regarding its standard-essential patents is what put Qualcomm in hot water. The FTC says the chipmaker has become an abusive monopoly in three ways:

It allegedly maintains a “no licence, no chips” policy that requires a device manufacturer to agree to Qualcomm’s preferred royalty terms. The FTC claims this policy results in “elevated” royalties being paid to Qualcomm in the event that one of its manufacturing customers wants to, for example, use a Qualcomm CPU but go with Intel’s baseband processor.

It allegedly refuses to licence its patents to direct competitors.

From 2011 to 2016, it reduced its hefty royalty fees for Apple to gain exclusivity in the iPhone—allegedly hobbling competitors’ chances of gaining a foothold in the industry by preventing them from being part of the most popular smartphone on the planet.

These claims of anti-competitive practices were echoed in ‘friend of the court’ briefs filed by Intel and Samsung to support the FTC’s case. Neither of those competitors tried to claim that Qualcomm is bad at what it does, and both praised its history of innovation. But Intel claimed that Qualcomm’s lead in the industry has resulted in an “interlocking web of abusive patent and commercial practices” that have “illegally coerced mobile phone manufacturers into purchasing the chipsets they need from Qualcomm and Qualcomm alone.” Samsung claimed that, because it is both a manufacturer of chipsets and a manufacturer of mobile handsets that licence patents from Qualcomm, it has routinely experienced Qualcomm’s refusal “to licence its SEPs on fair, reasonable, and non-discriminatory (‘FRAND’) terms so that Samsung can make and can sell licensed chipsets.”

Why Any of This Matters

OK, that’s all very weedsy, and it’s unclear how this matters to the average gadget-lover. The bottom line is that the FTC believes that we’d all be paying significantly lower prices for our devices if Qualcomm was not charging a “tax” for these patents. Obviously, Samsung is a huge company that deserves no sympathy. But as it pointed out in its amicus brief, smaller players can’t even take on the pressures of this type of litigation, much less rise to the level of competing against Qualcomm. Potential rivals of Qualcomm also might fear poking the beast and disrupting other industry relationships. “Other chipmakers may not wish to sue Qualcomm for a number of reasons, including fear of countersuit for infringement, escalation, litigation fees, disrupted relationships with OEMs,” Samsung’s lawyers wrote.

A big part of what’s being argued is that quite a bit of innovation has taken place since Qualcomm’s patents became essential for connecting smartphones to a network. But connecting to a cellular network is just one of many things modern smartphones do. In other words, what makes a smartphone smart now isn’t exactly the same as it was in, say, 2006, so should Qualcomm be demanding the same royalty rate that it did over a decade ago?

Antitrust law is not an exact science, and as it works today, figuring out if a company broke antitrust rules is quite different from determining whether someone robbed a bank or committed a murder. Intellectual property activist Florian Mueller summed up the difficult complications of antitrust and patent law on his blog in 2017:

Intellectual property rights are monopolies (limited to 20 years in the specific case of patents), but antitrust law is an anti-monopoly law. If every legitimate patent royalty was considered a “tax” imposed by a “monopolist,” antitrust law would apply very broadly, but patent rights would be devalued. However, if every (actual) monopolist could just make an end run around competition law by labelling a monopoly tax as a “patent royalty,” patent rights would serve as a (powerful) pretext and anyone wielding a patent would be immune to antitrust scrutiny.

The FTC’s case is trying to prove that a variety of behaviours by Qualcomm—like allegedly strong-arming exclusivity and charging some competitors “elevated royalties”—add up to a violation of the law. U.S. District Judge Lucy Koh is the person who will have to evaluate the variables and decide if the FTC has made a strong enough case.

Many experts thought there was a strong antitrust case against the merger of AT&T and Time-Warner last June, but government prosecutors failed to convince the judge. So far, however, there’s reason to believe that things might be going the FTC’s way this time around. Judge Koh already issued a summary judgment in November ruling that Qualcomm must licence its patents at a fair rate to its competitors.

Surprisingly, Koh also rejected both parties’ request to delay a trial while they engage in settlement talks. At its most recent Senate oversight hearings, all five leaders of the FTC commission agreed that one of the agency’s biggest priorities should be taking more cases to trial. Trials have greater consequences than settlements—they’re time-consuming, expensive, create investor uncertainty, and in some cases can carry criminal penalties. All of those factors act as deterrents to prevent companies from even giving the appearance of engaging in anti-competitive practices. Settlements, on the other hand, are much easier to calculate as a cost of doing business. Whatever Koh’s reasoning for insisting the trial move forward, the FTC should be happy to get into a courtroom and battle this out.

In the event that Koh finds Qualcomm guilty, the FTC has left the potential consequences fairly wide open. In its complaint, prosecutors asked for a “court order to undo and prevent Qualcomm’s unfair methods of competition” and an order for “Qualcomm to cease its anticompetitive conduct and take actions to restore competitive conditions.” What that means in concrete terms, at this point, is anyone’s guess.

On top of the health of antitrust enforcement and the general price of the latest devices, we’re also seeing a battle play out over who will become the next Qualcomm. On Friday, the FTC’s first two witnesses against Qualcomm were Chinese competitors Huawei and Lenovo. Huawei saying it’s being treated unfairly coincides with the U.S. government maintaining that the company’s potential dominance in 5G infrastructure represents a national security threat because its equipment may be compromised by Chinese authorities. Unspecified ‘security concerns’ have been at the heart of this case all along the way, as one of America’s biggest chipmakers faces the potential loss of royalties that sustain future innovation. The FTC’s two-year legal fight with Qualcomm led nervous investors to seek a merger with Singapore-based company Broadcom. In March, President Trump blocked the merger on national security concerns.

So many issues that go to the heart of how our technological ecosphere functions will be coming up in a California courtroom over the next three weeks. Whatever the outcome, it will be fittingly disruptive to an industry that prides itself on disrupting everything.

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